2008 (11) TMI 678 - AT - Income Tax

Summary

Issues Involved:
1. Penalty u/s 271(1)(c) for incorrect set-off of long-term capital loss.
2. Proportionate disallowance u/s 14A.

Summary:

1. Penalty u/s 271(1)(c) for incorrect set-off of long-term capital loss:
The assessee filed a return declaring income under "House Property and Business Income" and long-term capital gain. The Assessing Officer (AO) determined the total business income and long-term capital gain, initiating penalty proceedings u/s 271(1)(c) due to incorrect set-off of long-term capital loss against short-term capital gains, contrary to section 74 of the Act. The CIT(A) confirmed the AO's calculation, and the assessee argued that the provisions were clarified only after an amendment effective from 1.4.2003. The Tribunal noted that prior to the amendment, the law did not specify the order of set-off, and the assessee's belief in setting off long-term capital loss against short-term capital gain was bona fide. The Tribunal referenced the Special Bench decision in JCIT vs. Montgomery Emerging Markets Funds, which supported the assessee's method. Consequently, the penalty u/s 271(1)(c) was deemed unjustified and deleted.

2. Proportionate disallowance u/s 14A:
The AO made a proportionate disallowance u/s 14A, which was confirmed by the CIT(A). The assessee contended that the issue was still debatable, as different Benches had varied views on the matter. The Tribunal agreed, noting the ongoing debate and differing judicial opinions, and concluded that the penalty u/s 271(1)(c) could not be levied for the disallowance made u/s 14A.

Conclusion:
The Tribunal set aside the CIT(A)'s order and deleted the penalty u/s 271(1)(c), allowing the assessee's appeal. The judgment emphasized the bona fide belief of the assessee and the debatable nature of the issues involved. The order was pronounced in open court on 12.11.2008.